Another year is almost over, and as always, it’s useful to reflect on what has gone by, what lessons we can learn from that, and what we should do differently in the coming year. It has certainly been a challenging year. We started with world markets performing strongly, albeit briefly, and there was hope, at least in some quarters, that President Trump would quieten down, and start to produce some worthwhile results. Unfortunately, it was not to be, and the resignation of Jim Mattis this week could well be a turning point in the Trump phenomenon. I have the strongest admiration for Mattis and felt that as long as he was a strong voice in cabinet, things would work out. Now even Mattis is gone — leaving who knows what behind. Things are no better in Europe. There is massive angst over Brexit, Italy is on the verge of bankruptcy, and in Paris they are rioting in the streets over fuel price increases while their politicians busy themselves with passing laws to ban spanking children. The result of all this uncertainty is markets tumbling across the globe — with many investors confused, bewildered, and scared of what 2019 might bring. Many are asking whether they should move to the perceived safety of cash until a recovery comes. An email I received this week is typical: “In July I moved my super of $300,000 to the Hostplus Balanced Fund as I heard they were a consistent performer over a significant period. I am shocked to find my balance has dropped to $283,000”. I reminded this correspondent that it’s normal for share markets to have four negative years every decade — which means there are six positive ones. But all share-based investments fluctuate, sometimes wildly. The important things to keep in mind are: first, that you do not make a loss until you sell; second, that nobody can consistently and accurately forecast when to enter and leave the market; and third, that when markets rebound, the biggest gain is usually just after the rebound. When you invest in shares you own a tiny portion of a business. And the long-term success of your investment will depend on the progress of that business. The Catch-22 is that the price on any given day may not necessarily reflect what the company is doing. For example, I own a parcel of shares in a company with a very small market capitalisation. The shares are tightly held, so only a tiny minority are traded on the market. In the last eight months the listed value of those shares have dropped 50 per cent, even though the company is doing well and there is no reason to get out. Another good example is Zillow, which is the American equivalent of&nbsp;www.realestate.com.au. It’s the dominant player in the American real estate market and is going better than ever, but in the last six months its shares have fallen from around $70 to $28. As I have an investment in a fund with a big interest in Zillow, my investment has tumbled in line with the Zillow share price. But I have faith in the long-term future of Zillow, so I’m prepared to hang in there. This is the attitude we investors have to take. When you own shares in a company you are an investor in that business. As long as you have faith in the future of that business there is no point in cashing out and converting a paper loss to a real one. In any event, if you own shares in a good business the dividends should continue even if the price bounces around. Here's to a healthy and prosperous 2019. May your faith in the market be well rewarded.

Investing can mean short-term pain for long-term gain

Bumps in the road: It’s normal for share markets to have four negative years every decade — which means there are six positive ones. But all share-based investments fluctuate, sometimes wildly.

Another year is almost over, and as always, it’s useful to reflect on what has gone by, what lessons we can learn from that, and what we should do differently in the coming year.

It has certainly been a challenging year. We started with world markets performing strongly, albeit briefly, and there was hope, at least in some quarters, that President Trump would quieten down, and start to produce some worthwhile results.

Unfortunately, it was not to be, and the resignation of Jim Mattis this week could well be a turning point in the Trump phenomenon. I have the strongest admiration for Mattis and felt that as long as he was a strong voice in cabinet, things would work out. Now even Mattis is gone — leaving who knows what behind.

Things are no better in Europe. There is massive angst over Brexit, Italy is on the verge of bankruptcy, and in Paris they are rioting in the streets over fuel price increases while their politicians busy themselves with passing laws to ban spanking children.

The result of all this uncertainty is markets tumbling across the globe — with many investors confused, bewildered, and scared of what 2019 might bring. Many are asking whether they should move to the perceived safety of cash until a recovery comes.

An email I received this week is typical: “In July I moved my super of $300,000 to the Hostplus Balanced Fund as I heard they were a consistent performer over a significant period. I am shocked to find my balance has dropped to $283,000”.

I reminded this correspondent that it’s normal for share markets to have four negative years every decade — which means there are six positive ones. But all share-based investments fluctuate, sometimes wildly.

The important things to keep in mind are: first, that you do not make a loss until you sell; second, that nobody can consistently and accurately forecast when to enter and leave the market; and third, that when markets rebound, the biggest gain is usually just after the rebound.

When you invest in shares you own a tiny portion of a business. And the long-term success of your investment will depend on the progress of that business. The Catch-22 is that the price on any given day may not necessarily reflect what the company is doing.

For example, I own a parcel of shares in a company with a very small market capitalisation. The shares are tightly held, so only a tiny minority are traded on the market. In the last eight months the listed value of those shares have dropped 50 per cent, even though the company is doing well and there is no reason to get out.

Another good example is Zillow, which is the American equivalent of www.realestate.com.au. It’s the dominant player in the American real estate market and is going better than ever, but in the last six months its shares have fallen from around $70 to $28. As I have an investment in a fund with a big interest in Zillow, my investment has tumbled in line with the Zillow share price. But I have faith in the long-term future of Zillow, so I’m prepared to hang in there.

This is the attitude we investors have to take. When you own shares in a company you are an investor in that business. As long as you have faith in the future of that business there is no point in cashing out and converting a paper loss to a real one.

In any event, if you own shares in a good business the dividends should continue even if the price bounces around.

Here's to a healthy and prosperous 2019. May your faith in the market be well rewarded.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance | noel@noelwhittaker.com.au